Monday, August 22, 2011

The Stock Market's Downside Risk

August 22, 2011
The Market Ticker: Are You Ready? The Government Doesn't Give A Damn

400 is roughly where the S&P was before the "great bull market of fraud" began in 1995. To think we can't return there when the fraud collapses is utter folly. We not only can, we probably will.

The S&P 500 closed at 459.27 on December 30, 1994.
The DJIA closed at 3,834.44 on December 30, 1994.

August 8, 2011
Stock Market Risk Analysis v.2

Note the green trend line in the chart.


Stagflationary Mark said...

I am especially prone to the arguments he is making by the way.

The following is where I once worked.


Just months after the merger, in April 1998 Cendant uncovered massive accounting improprieties at CUC which resulted in one of the largest financial scandals of the 1990s. At the time, Vice Chairman E. Kirk Shelton, had inflated the company's revenue by $500 million over a period of three years. When this report was released to the public, the resulting damage to the market value for the company was approximately $14 billion, with their stock tumbling from a high of $41 down to nearly $12. At the time, this fiasco was the largest case of accounting fraud in the country's history. Mr. Shelton is now serving a 10 year prison sentence. Former CEO Walter Forbes was sentenced to 12 years in prison in 2007. After the accounting scandal was uncovered, Silverman and the Cendant board forced Forbes’ resignation and Silverman assumed the CEO post. Under Silverman, Cendant bounced back from the accounting scandal far outperforming the markets in the early 2000s.

Who Struck John said...

I still have three months to hit my target.

Mr Slippery said...

One thing is clear. Financial fraud and lies were always part of the game, the "bezzle" as JK Galbraith called it.

But the bezzle seemed to explode in the 90s along with the FIRE economy. Enron, Worldcom, etc. But those were just the appetizers leading to the main course of AIG, TBTF banks, derivatives reaching a quadrillion notional. The main course has not been digested yet.

I worked in a start up IT services company in the early 90s that went on to become a billion dollar business. One of the VPs sent me on a sales call and it turned out later, the customer flat out lied to me on some issues that cost us money. When I told the VP, he laughed at me and said, of course he lied to you, this is business, what did you expect?

Stagflationary Mark said...

Who Struck John,

I see no reason to change my prediction of Dow @ 2600, S&P 500 @ 275, in November 2011.

Wow! That's okay. I found your anti-matter counterpart. I believe in fair and balanced reporting here. ;)

April 13, 2011
Press Release: John Thomas Financial CEO Thomas Belesis Appears as a Featured Guest on CNBC’s “The Kudlow Report”

Kudlow’s “Free Market Friday” began with a reference to “nattering nabobs of negativity,” a phrase coined by award-winning writer Bill Safire in 1970 to describe market pessimists. Invited to lead off the segment, Belesis pointed out that despite recent global setbacks, corporate earnings are growing and the market continues to outperform.

“The bulls have tremendous wind on their back, the fed is pumping money into the system to keep this recovery going, you have corporate earnings growing ever quarter. Seventy-five percent of all S&P 500 earnings have been increasing. Why? Because businesses are growing,” said Belesis.

S&P 500 close on April 13, 2011: 1,314.41
S&P 500 on August 22, 2011: 1,123.82

17% loss

Who Struck John said...

Clearly I underestimated just how long extend and pretend could go on! :)

Stagflationary Mark said...

Mr Slippery,

The main course has an incredible number of water hazards. I suggest teeing off with a putter. You won't get a great score but you also won't lose your balls, lol.

I can't resist. Sorry!

Stagflationary Mark said...

Who Struck John,

Maybe you underestimated and maybe you didn't. November does have a Black Friday in it. D'oh!

Stagflationary Mark said...

Oops. I said 17% loss earlier. It was 15%. It just didn't look right to me so I double checked.

Troy said...

While I think KD talks his book too much I do respect his trading chops. I learned a lot from his videos back in 2008.

I kinda got caught up in daytrading in 2008. Not that I wanted to, but by early 2008 I had a grip on the impending loss of $1T+/yr bubble stimulus and thus I knew the whole thing was going to pancake badly.

What surprised me was the speed of the get-out. I was expecting a repeat of the 2001 drawdown, but in 2H08 people got out a lot quicker than that.

So in 2H11, if a 5 of 5 down comes, we could get instant capitulation I guess.

The political angle sure is a lot screwier now compared to 2008. There's more people in congress now who are wanting to see the thing collapse for good.

Stagflationary Mark said...


I think a variant of Murphy's Law applies here.

A stock market crash is always twice as bad as the average investor expects.

The first crash surprised investors. It was twice as bad as they thought. They then factored that into their thinking.

The second crash surprised investors. It was twice as bad as they thought. They are now factoring that into their thinking.

I think a third crash could surprise people. It could easily be twice as bad as they are thinking. I really don't think we'll like what they will factor into their thinking if it happens.

Stagflationary Mark said...

Trivia Time

See that green trend line in my chart.

Let's say the DJIA stagnates at 10,000 until the green line comes up to meet it.

Guess what year that would be.

Don't look.

Here comes the answer.


I'm just a nattering nabob of negativity of course.

Stagflationary Mark said...

More Trivia Time

We were on the green trend line in 1932.

We were on the green trend line in 1982.

That's a 50 year difference.

Next stop... 2032?

@#$%! I'm nattering again.

Stagflationary Mark said...

Even More Trivia Time

Japan's stock market is roughly 75% lower than it was when their housing bubble popped in 1990. That's two decades of declines.

Our housing bubble popped in 2007.


I just nattered again. Sorry.

Troy said...

"This year, about 3.3 million people are expected to apply for federal disability benefits. That's 700,000 more than in 2008 and 1 million more than a decade ago."

The Baby Boom is edging up on 62/65. . . the annual cohort is around 4M/yr so that's a pretty big bumrush into SSI. . .

Gonna have to raise taxes to pay for our $1T/yr military, or cut it back, both are deflationary.

I see a lot of headwinds and no tailwinds.

'course I felt the same thing in 1992.

Stagflationary Mark said...


My girlfriend applied. She's got dystonia. Don't know what will come of it. They aren't quick to approve applications. It's all about appeal and retry.

I see a lot of headwinds and no tailwinds.

Jeremy Siegel will never give up.

Jeremy Siegel Gives A Positive Stock Market Valuation Argument

Let us make the extremely pessimistic assumption that there is no economic growth either in the U.S. or the rest of the world for the next 10 years so that the earnings that are now generated from S&P 500 firms remain frozen at current levels.

I love the rebuttal.

Siegel assumes no growth in earnings, but in the flat world growth scenario he uses, we would expect earnings to erode.

Stagflationary Mark said...

Here's a bonus thought.

Real GDP has grown 17% over the last decade and the stock market has gone nowhere.

His worst case assumption is that real GDP will grow 0% over the next decade and that somehow becomes a reason to be bullish?

Further, just once I'd like to see him write the truth about what is propping up the stock market.

It's the treasury market! If he truly thinks treasuries are in a bubble then that's a bit like saying that the stock market house is incredibly sturdy but the foundation is infested with termites.

Good luck on that one!

mab said...

Further, just once I'd like to see him write the truth about what is propping up the stock market.

It's the treasury market!


Bingo. The intellectual dishonesty surrounding our financial system is mind boggling. Imo, the eCONomic lies are purposefully perpetuated. Seriously, how hard would it be for Bernanke to dispel some of the myths and lies? It's telling that he does the opposite, no?

Mainstream eCONomic beliefs are indeed religious in nature. The facts just don't matter to fanatics, they get their info from eCONomic priests and holy text books.

Denninger and others think that a day of reckoning is always at hand. An eCONomic rapture is imminent and unavoidable. They act as though Japan doesn't even exist.

I'm of the opinion that if Japan can kick the can down the road for decades so can we.

Word ver: "swelies"

Audrey said...

I don't know - I can't decide whether we can kick the can for decades more...

On the one hand, the bigger they are, the harder they fall. Which is to say, maybe Japan just didn't fall as hard as we are going to.

And on the other hand, a good argument I once read about being the passenger in a car. You don't have to get too stressed out about the driver's actions, because basically they don't want to die, and will try not to get in an accident.

But there are so many drivers. Like lemmings, they may crowd each other off the cliff.

All I have are cliches and anecdotes and opinions. Thanks for the charts and hard data.

Stagflationary Mark said...


It would seem that the quick descent into economic hell has been "poned" yet again. (For the benefit of others, poned is an inside joke around here based on the word postponed.)

It is one thing to prepare for worst case outcomes, but preparing for likely case outcomes should also be a priority.

In my opinion, a gradual descent into hell is plenty terrifying. It does lack the drama though.

Anonymous said...

Mentioning cars and Japan is interesting. Japan ate our lunch in the car industry during the 80's, yet they still collapsed under the weight of a RE bubble and now we have since 2008. Next up China and their RE fiasco. How many cans these bankstas got anyway?? :)

Stagflationary Mark said...


On the one hand, Japan ran a trade surplus. It will therefore be harder for us.

On the other hand, Japan did it alone. In sharp contrast, we have plenty of company. Much of the world is no better off than we are.

And on that third hand, only robots can make use of three hands simultaneously. Not sure what my point is here, but it probably isn't the basis for employment optimism. D'oh!

Stagflationary Mark said...


How many cans these bankstas got anyway??

3500 canned.

Looking ahead, Maris said he expects the pace of bank layoffs to persist...

I continue to be bullish on innovative new canning processes.